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Price-fixing case

Airline price-fixing case sheds light on industry: analysts

Jul 06, 2008

SINGAPORE — Last month's agreement by Cathay Pacific and three other airlines to plead guilty and pay more than half a billion dollars in criminal fines has shed light on industry price-fixing, analysts say.

They say an industry culture that accepted the practice has allowed it to endure, especially in the cargo sector, while the lack of Asia-wide anti-trust provisions has also been a contributing factor.

"It is impossible that an activity on this scale and geographical breadth could endure for years, unless it formed part of an endemic culture," the Sydney-based Centre for Asia Pacific Aviation (CAPA) consultancy said.

"For a heavily regulated industry that is only now emerging from government ownership, it is hardly surprising that this culture would overhang the widespread changes that have taken place."

The US Department of Justice said four airlines, including Air France-KLM and Hong Kong-based Cathay Pacific, agreed to pay criminal fines totalling 504 million US dollars for conspiring to fix air cargo prices until at least February 2006.

A subsidiary of Danish carrier SAS, and Martinair Holland, also agreed to plead guilty to similar charges, it said.

Air France-KLM will pay the heaviest fine among the four, totalling 350 million dollars. Officials said the penalty was the second highest ever applied in a US criminal anti-trust investigation.

While cargo prices were the focus of the latest fines, British Airways and Korean Air last year pleaded guilty and were each sentenced to pay 300-million-dollar criminal fines for conspiring to fix international passenger charges, and air cargo rates, the justice department said.

The British Airways conspiracy involved fuel surcharges, it said.

"I don't think it's anywhere near as prevalent on the passenger side as on the cargo side," said Jim Eckes of Indoswiss Aviation consultancy in Hong Kong.

He said cargo operations are often run by people with experience in passenger travel who do not necessarily understand the freight sector and feel: "Let 'em do what they want to do as long as it's profitable."

Peter Harbison, CAPA's executive chairman, agreed that fixing cargo prices is easier, but said it used to occur "fairly openly" on the passenger side until about 10 years ago -- and that that culture still "overhangs" today.

He noted that the aviation industry was rapidly evolving to a more purely commercial sector but that it still has a mix of government operators.

"There's a lot of interaction at management level between airlines," Harbison said. "It is actually not illegal -- not in most jurisdictions anyway."

Eckes agreed that talking about prices between competitors has more of a stigma in the United States, where the law is firm.

Shukor Yusof, an aviation analyst with Standard and Poor's Equity Research, said Asia lacks an over-arching anti-trust legal framework.

"There's no one main body to oversee that kind of thing," he said.

But the trade association representing 17 airlines in the region rejected allegations that the industry is still dogged by a culture that accepts price-fixing.

"I wouldn't see that as a fair characterisation," said Andrew Herdman, director general of the Association of Asia Pacific Airlines.

"International airlines operate across the world and have to comply with laws and regulations of various countries," Herdman said.

Almost every jurisdiction has regulations that govern competition, "although there are differences in approach," he said.

Herdman added that the industry is intensely competitive, with thin profit margins at the best of times.

While governments must implement legislation, airline owners have to discourage cooperation that leads to price-fixing, Harbison said.

The rise of low-cost carriers has helped, and further freeing up markets will reduce the incidence of collusion, he said. "Fixing fares does require a certain amount of dominance in the market."

Justice department officials, whose investigation continues, said Cathay and the three other airlines plotted to "suppress and eliminate" competition.

They said the conspiracy affected billions of dollars of consumer and other goods shipped by the airlines, including produce, electronics and medicines, over several years.

The plea agreements are subject to US court approval, and follow fines imposed earlier this year against Qantas of Australia and Japan Airlines for a similar conspiracy.

Analysts say the US fines are substantial.

"It won't materially impact on the balance sheet," Yusof said. "More than anything else it is the reputation."


Airline price-fixing case sheds light on industry: analysts

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